Tuesday, August 28, 2007

The difficulty in being Objective

Today, I will embark on a short, succinct but very relevant post on objectivity. As investors, I had mentioned that the hardest thing to master are your emotions and this is the number one chief reason why so many people lose money in the stock market. Not only must you be able to grasp the company’s fundamentals well and analyze the financial statements; but one must also be able to control the emotional urges that get other investors into trouble, namely fear and greed. Objectivity is another aspect of the emotional equation, in which an investor’s mind tends to be clouded, subjective and biased until he can get past the “vested interest syndrome” as I call it.

Just what exactly is this weird-sounding syndrome ? To put it in layman’s terms, it simply means falling in love with the stock and company ! In all honesty, I may also be guilty of this without realizing it as many of my companies form my core long-term holdings. People tend to seek out information which affirms their beliefs and every investor would do their best to uncover information which is positive for their investments; thereby leading to the dangerous situation where potential negative developments surrounding the company’s industry or fundamentals remain “shrouded” because of selective retention. Investors tend to shun bad news about their investments because it does not conform to their expected view of how their investments should perform. Hence, this is a selective bias which, admittedly, is very difficult to detect and eliminate. It usually requires an objective non-vested third-party to provide a more objective and balanced view of a company.

This is why I strongly encourage feedback on my blog (through comments) when I write on the companies I own. My analysis may be flawed and skewed as I am vested, thus it may impair my objectivity in analyzing the situation as I may only see the rosy side and not the potentially negative side. On my own, I also visit forums to check out quality postings and others’ analysis of my companies in order to obtain a more balanced view. I actually encourage dissenting views and differing opinions which may enable me to view a company from a different perspective, and I try hard to reduce and eliminate the selective perception tendency (which filters out all negative news automatically). Thus far, I have had balanced views on Global Voice, Ezra Holdings and also Pacific Andes and have taken these views into account when I blog about the risks of such businesses. Without such views and opinions in an open forum, I doubt I would have been able to provide both sides of the story regarding a new company announcement or results release.

On the flip side though, while the importance of seeking differing opinions and viewpoints cannot be downplayed, it is also important for a value investor to maintain a certain degree of independent thinking. By this, I mean that one ought to use his own brain juice to think independently on the situation and not be overly influenced by crowd perception. As Benjamin Graham put it: “You are right not because the crowd is right; you are right because your reasoning and facts are correct”. People may have a hidden agenda, vested interest or behave too emotionally when it comes to talking about companies they either love or hate, thus take everything in stride but go through the pertinent facts in order to make your own decisions.

A parting note: Remember to view all facts objectively and impartially, as if you were a third-party observer. Although this had proved to be difficult for most investors due to the presence of emotional attachments to a company they either love or hate, it must still be attempted in order to obtain an unbiased view of one’s investment. Only then can an investor truly work towards achieving a reasonable rate of return on his investment.

Update: Thanks to little willow for pointing out that the above quote (in bold) was made by Benjamin Graham and not Warren Buffett. I have amended the post to reflect this.


Little Willow said...

Hi, good post. Just a small point -

[As Warren Buffett put it: “You are right not because the crowd is right; you are right because your reasoning and facts are correct”.]

this statement was actually made by Benjamin Graham when he was giving a testimony in front of congress, not Warren Buffett.


Anonymous said...

Hi Musicwhiz,

I'm a new and learning investor. Your bog is my must read everyday and I really like your style of investments. I agree that company's fundamentals are very important and one also needs to control his/her emotional urge. However, to minimise our fear timing is also a crucial factor. As Mr Market is currently going through a steep and significant correction, do u think this is the good time to invest? Also since there are more undervalued stocks sufacing, it would be good if you have a write up on this topic.

Anonymous said...

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful..... Warren Buffett

Should we be greedy now?

musicwhiz said...

Hi little willow,

Many thanks for the correction; yeah I thought it should have been ol' Ben Graham instead of W. Buffett. Without people like yourself to correct me now and then, I would be making the same mistakes or mis-quoting people LOL.

Have a great week ! :)

musicwhiz said...

Hi Anonymous,

Thanks for visiting regularly. Yes, I think now is a good time to look out for value buys as Mr. Market is being manic-depressive on certain days and offering good prices to buy into good companies.

Frankly, the reason I have not written on "good buys" in depth is because it takes quite a lot of research to write about a company, and currently I have not much time (by way of personal time juggling between career and family) to handle such research. As it is now, you can see that I am already up to my eyeballs keeping track of my current investments haha.....

Also, I would rather, at this point in time, commit more funds to companies I already own as I know them very well; instead of actively sourcing for another investment. While my goal is to find at least one ot 2 more good companies, I am in no particular hurry as my investing journey has onlt just begun. I liken my investing to having 20 punch cards, so far I used up 4 in buying Ezra, Swiber, Pacific Andes and Boustead. I will have to screen more carefully and learn to say "no" often just to pick another gem.

In the meantime, best of luck for your investments !

P.S. - After finishing my series on personal finance, investment mistakes and research, I may start one on under-valued companies on SGX. No promises though. :)

musicwhiz said...

Hi Anonymous,

Should we be greedy now ? That's a good question indeed ! For myself, I am only greedy when Mr. Market offers a price which gives a margin of safety to intrinsic value. I am an investor who prefers to average down rather than up but I am willing to make exceptions if I see good value in an existing company I own whose price has been unfairly depressed. Thus, I am more than willing to collect more of Swiber below $2 or Boustead below $1.80, if Mr. Market permits.

I have to admit though, that my computations for intrinsic value could be improved. I am seeking out a spreadsheet to do a more objective review of intrinsic value based on the FCF of the business and future prospects. as value investors, we can never learn enough and must constantly strive to upgrade outselves. I will keep readers informed if I manage to fine-tune my valuation criteria for companies.

Cheers, musicwhiz

snapper said...

Hi musicwhiz,

This "outside looking in" psychology is a gentle reminder to detach our emotions from the stocks we are holding...eliminate the bious. I like your passion in value investing and find your articles a compelling read.



musicwhiz said...

Hello Snapper,

Yes, emotional detachment is the key to success in investing. We must use a cold, logical and rational way of looking at the companies we own and try not to "fall in love" with them. It's difficult but should be attempted if we are to objectively evaluate the company.

Thanks for your compliment and good luck in your investments !

Regards, musicwhiz

Shingo T said...

I stalk your blog daily.

Thks for the effort. ^_^

musicwhiz said...

Hi shingo t,

I stalk the companies I own daily too....haha :P (kidding !)

Thanks for visiting. :)

Regards, musicwhiz